Carroll Quigley - Tragedy and Hope - A History of the World in Our Time

Of the diverse groups in the American economy, the financiers were most closely related to heavy industry because of the latter’s great need for capital for its heavy equipment. The deflationary policies of the bankers were acceptable to heavy industry chiefly because the mass labor of heavy industry in the United States, notably in steel and automobile manufacturing, was not unionized, and the slowly declining prices of the products of heavy industry could continue to be produced profitably if costs could be reduced by large-scale elimination of labor by installing more heavy equipment. Much of this new equipment, which led to assembly-line techniques such as the continuous-strip steel mill, were financed by the bankers. With unorganized labor, the employers of mass labor could rearrange, curtail, or terminate labor without notice on a daily basis and could thus reduce labor costs to meet falls in prices from bankers’ deflation. The fact that reductions in wages or large layoffs in mass-employment industries also reduced the volume of purchasing power in the economy as a whole, to the injury of other groups selling consumers’ goods, was ignored by the makers of heavy producers’ goods. In this way, farmers, light industry, real estate, commercial groups, and other segments of the society were injured by the deflationary policies of the bankers and by the employment policies of heavy industry, closely allied to the bankers. When these policies became unbearable in the depression of 1929-1933, these other interest blocs, who had been traditionally Republican (or at least, like the western farmers, had refused to vote Democratic and had engaged in largely futile third-party movements), deserted the Republican Party, which remained subservient to high finance and heavy industry.

This shift of the farm bloc, light industry, commercial interests (notably department stores), real estate, professional people, and mass, unskilled, labor to the Democratic Party in 1932 resulted in the election of Franklin D. Roosevelt and the New Deal. The new administration sought to curtail the power of the two opposition and exploiting groups (bankers and heavy industry) and to reward and help the groups which had elected it. The farmers were helped by subsidies; labor was helped by government spending to make jobs and provide purchasing power and by encouragement of unionization; while real estate, professional people, and commercial groups were helped by the increasing demand from the increased purchasing power of farmers and labor.

The New Deal’s actions against finance and heavy industry were chiefly aimed at preventing these two from ever repeating their actions of the 1920-1933 period. The SEC Act sought to supervise securities issues and stock-exchange practices to protect investors. Railroad legislation sought to reduce the financial exploitation and even the deliberate bankruptcy of railroads by financial interests (as William Rockefeller had done to the Chicago, Milwaukee, and St. Paul or as Morgan had done to the New York, New Haven and Hartford). The Banking Act of 1933 separated investment banking from deposit banking. The wholesale manipulation of labor by heavy industry was curtailed by the National Labor Relations Act of 1933, which sought to protect labor’s rights of collective bargaining. At the same time, with the blessings of the new administration, a drive was made by labor groups allied with it to unionize the masses of unskilled labor employed by heavy industry to prevent the latter from adopting any policy of mass layoffs or sharp and sudden wage reductions in any future period of decreasing demand. To this end a Committee for Industrial Organization was set up under the leadership of the one head of a mass labor union in the country, John L. Lewis of the United Mine Workers, and a drive was put on to organize the workers of the steel, automobile, electrical, and other industries which had no unions.

All this served to create more highly organized and more self-conscious interest blocs in American life, especially among farmers and labor, but it did not represent any victory for unorthodox financing, the real key to either monopoly capitalism or to a managed pluralist economy. The reason for this was that the New Deal, because of President Roosevelt, was fundamentally orthodox in its ideas on the nature of money. Roosevelt was quite willing to unbalance the budget and to spend in a depression in an unorthodox fashion because he had grasped the idea that lack of purchasing power was the cause of the lack of demand which made unsold goods and unemployment, but he had no idea of the causes of the depression and had quite orthodox ideas on the nature of money. As a result, his administration treated the symptoms rather than the causes of the depression and, while spending unorthodoxly to treat these symptoms, did so with money borrowed from the banks in the accepted fashion. The New Deal allowed the bankers to create the money, borrowed it from the banks, and spent it. This meant that the New Deal ran up the national debt to the credit of the banks, and spent money in such a limited fashion that no drastic reemployment of idle resources was possible.

One of the most significant facts about the New Deal was its orthodoxy on money. For the whole twelve years he was in the White House, Roosevelt had statutory power to issue fiat money in the form of greenbacks printed by the government without recourse to the banks. This authority was never used. As a result of such orthodoxy, the depression’s symptoms of idle resources were overcome only when the emergency of the war in 1942 made it possible to justify a limitless increase in the national debt by limitless borrowing from private persons and the banks. But the whole episode showed a failure to grasp the nature of money and the function of the monetary system, of which considerable traces remained in the postwar period.

One reason for the New Deal’s readiness to continue with an orthodox theory of the nature of money, along with an unorthodox practice in its use, arose from the failure of the Roosevelt administration to recognize the nature of the economic crisis itself. This failure can be seen in Roosevelt’s theory of “pump priming.” He sincerely believed, as did his secretary of the Treasury, that there was nothing structurally wrong with the economy, that it was simply temporarily stalled, and would keep going of its own powers if it could be restarted. In order to restart it, all that was needed, in New Deal theory, was a relatively moderate amount of government spending on a temporary basis. This would create purchasing power (demand) for consumers’ goods, which, in turn, would increase the confidence of investors who would begin to release large unused savings into investment. This would, again, create additional purchasing power and demand, and the economic system would take off of its own power. The curtailment of the powers of finance and heavy industry would then prevent any repetition of the collapse of 1929.

The inadequacy of this theory of the depression was shown in 1937 when the New Deal, after four years of pump priming and a victorious election in 1936, stopped its spending. Instead of taking off, the economy collapsed in the steepest recession in history. The New Deal had to resume its treatment of symptoms but now without hope that the spending program could ever be ended, a hopeless prospect since the administration lacked the knowledge of how to reform the system or even how to escape from borrowing bank credit with its mounting public debt, and the administration lacked the courage to adopt the really large-scale spending necessary to give full employment of resources. The administration was saved from this impasse by the need for the rearmament program followed by the war. Since 1947 the Cold War and the space program have allowed the same situation to continue, so that even today prosperity is not the result of a properly organized economic system but of government spending, and any drastic reduction in such spending would give rise to an acute depression.